Modelling British Interest Rate Adjustment: An Error Correction Approach

An error correction model is used to capture the dynamics of British retail deposit and loan rate responses to changes in the central bank’s base rate. The test is conducted using a monthly series of interest rates for four generic retail banking products over the period 1986–93. The adjustment process is found to vary considerably between and within banks and products. The results suggest that this market continues to exhibit many features of imperfect competition, and that adjustment differences could affect the speed of the money transmission mechanism.